Read the FT article "Danger of living in a benchmark bubble" by Michael Voss. According to the author, what is the primary "quality" of the index funds? What are the possible impact of benchmark investing on companies' behavior to get listed in an index? With supporting data from any periods after the article was published, (e.g., you can use one of the major index funds, such as Dow Jones Industrial Average or S&P 500, among others, for your answer) do you agree or disagree with the author's view that there is a dangerous benchmark bubble? Note that investment professionals use 40% or greater decline as a cutoff for market 'mega-meltdown'.
Financial Times, Aug 19, 2002 Danger of living in a benchmark bubble conventional investing would be too onerous and time-consuming, given the large volumes of managed MICHAEL VOSS funds. WORLD VIEW.. And, finally, it is important to place the funds in highly liquid shares so Are the steep drops observed From an objective point of that they may be disposed of on the global stock view, and in the opinion of quickly - to investors that exchanges evidence that a professional investors, are making long-term "benchmark bubble" is these two factors rank low investments and who know beginning to burst? on the list of significant what they have invested in, In my view, benchmark factors. this should not be of investing, say in the Euro Other factors - such as primary concern. Stoxx 50 index, is remote earnings, future earnings So what do you do? You from common sense and potential, intrinsic value and make benchmark conventional investment quality of management - are investments" or authorise philosophy. But millions of conspicuous by their "benchmark specialists". ordinary investors - who absence in the composition This means that the greater are, perhaps unknowingly, of index-linked share part of all funds is invested participating in the portfolios. in companies selected solely benchmark game - will have So, one cannot help because they are listed in a to foot the bill. wondering what makes the particular index. Stock markets have majority of all institutional Do the companies' listings always been something investors invest billions in in these indices not vouch special. Sometimes they the same shares, whose for security? Far from it. For have been driven by primary "quality" seems to a start, the companies' common sense and efforts to get such a listing complicated calculation may lead them to act in models; sometimes by fear, One would not ways that are not in the best greed and the lemming interests of the business: syndrome. think it possible engaging in mergers or Two years have gone by acquisitions, for instance, or since one of history's that so many tempting executives to greatest bubbles - the withhold or distort true high-technology bubble - investors could accounting figures. burst. Today, everyone There are other problems. agrees that this was a period show such Index shares are, on the of speculative and, in Alan whole, overpriced, since the Greenspan's phrase, irrational index-factor demand" has "irrational" exuberance. Few boosted their prices to a investors think they will fall behaviour for so significantly higher level into that trap again. than if they had not been Yet practically every long. But if listed. market participant - fund If you think that you can managers, pension funds, anything, it is on reduce the risk by commentators - have had a purchasing a wide range of hand in blowing up a bubble the increase index shares, you are many times larger than the mistaken. technology one. One would not think it Benchmark or be that they are listed on an possible that so many index-tracking is now a core index. investors could show such part of any portfolio run by What makes all investors irrational behaviour for so fund managers. It is an follow any fluctuations in, long. But if anything, it is on investment discipline best for instance, the Euro Stoxx the increase. characterised by the lack of 50 index and then try to As with all other bubbles investor knowledge, anticipate them by buying in which investment experience and thought: a and selling in advance? And, behaviour has been dictated conclusion you quickly to an even greater extent, by factors remote from arrive at when studying the try to anticipate fluctuations conventional investing, it selection criteria for the in the Morgan Stanley index will all come to an end, and shares in the most popular and any fluctuations the bursting of the indices. prompted by the new technology bubble will pale The criteria used are free-float trend? beside that of the market capitalisation - the The answer is benchmark bubble. individual companies' listed disappointing. First and Michael Voss is managing value- and free float - the foremost, it is the fear of director of Fundamental proportion of freely available underperforming. Another Investment, a Denmark-based shares. explanation is that fund manager. Financial Times, Aug 19, 2002 Danger of living in a benchmark bubble conventional investing would be too onerous and time-consuming, given the large volumes of managed MICHAEL VOSS funds. WORLD VIEW.. And, finally, it is important to place the funds in highly liquid shares so Are the steep drops observed From an objective point of that they may be disposed of on the global stock view, and in the opinion of quickly - to investors that exchanges evidence that a professional investors, are making long-term "benchmark bubble" is these two factors rank low investments and who know beginning to burst? on the list of significant what they have invested in, In my view, benchmark factors. this should not be of investing, say in the Euro Other factors - such as primary concern. Stoxx 50 index, is remote earnings, future earnings So what do you do? You from common sense and potential, intrinsic value and make benchmark conventional investment quality of management - are investments" or authorise philosophy. But millions of conspicuous by their "benchmark specialists". ordinary investors - who absence in the composition This means that the greater are, perhaps unknowingly, of index-linked share part of all funds is invested participating in the portfolios. in companies selected solely benchmark game - will have So, one cannot help because they are listed in a to foot the bill. wondering what makes the particular index. Stock markets have majority of all institutional Do the companies' listings always been something investors invest billions in in these indices not vouch special. Sometimes they the same shares, whose for security? Far from it. For have been driven by primary "quality" seems to a start, the companies' common sense and efforts to get such a listing complicated calculation may lead them to act in models; sometimes by fear, One would not ways that are not in the best greed and the lemming interests of the business: syndrome. think it possible engaging in mergers or Two years have gone by acquisitions, for instance, or since one of history's that so many tempting executives to greatest bubbles - the withhold or distort true high-technology bubble - investors could accounting figures. burst. Today, everyone There are other problems. agrees that this was a period show such Index shares are, on the of speculative and, in Alan whole, overpriced, since the Greenspan's phrase, irrational index-factor demand" has "irrational" exuberance. Few boosted their prices to a investors think they will fall behaviour for so significantly higher level into that trap again. than if they had not been Yet practically every long. But if listed. market participant - fund If you think that you can managers, pension funds, anything, it is on reduce the risk by commentators - have had a purchasing a wide range of hand in blowing up a bubble the increase index shares, you are many times larger than the mistaken. technology one. One would not think it Benchmark or be that they are listed on an possible that so many index-tracking is now a core index. investors could show such part of any portfolio run by What makes all investors irrational behaviour for so fund managers. It is an follow any fluctuations in, long. But if anything, it is on investment discipline best for instance, the Euro Stoxx the increase. characterised by the lack of 50 index and then try to As with all other bubbles investor knowledge, anticipate them by buying in which investment experience and thought: a and selling in advance? And, behaviour has been dictated conclusion you quickly to an even greater extent, by factors remote from arrive at when studying the try to anticipate fluctuations conventional investing, it selection criteria for the in the Morgan Stanley index will all come to an end, and shares in the most popular and any fluctuations the bursting of the indices. prompted by the new technology bubble will pale The criteria used are free-float trend? beside that of the market capitalisation - the The answer is benchmark bubble. individual companies' listed disappointing. First and Michael Voss is managing value- and free float - the foremost, it is the fear of director of Fundamental proportion of freely available underperforming. Another Investment, a Denmark-based shares. explanation is that fund manager
